Abstract

Using data on international banks’ ratings we find that banks with a greater capitalisation, larger assets, and a higher return on assets have higher bank ratings. Further, the more a bank’s liquidity increased in the past the greater is its rating, the larger is the ratio of its operating expenses to total operating income the lower is its rating and the more recent is the date that the rating is made the lower is the rating of the bank. There is also a strong country effect on bank ratings such that banks from certain countries have systematically higher ratings than others. The addition of this variable substantially raises the model’s accuracy at predicting a bank’s rating which is arguably the major challenge of modelling ratings. The inclusion and modelling of country-effects represents a notable innovation of this study.